Construction bid bonds are a topic that the new construction company owner may not know much about. I am going to give you a quick primer so you know what you are dealing with.

When you get into construction jobs of a larger scale, whether you’re a prime contractor or a subcontractor, you’re going to be required at some point to acquire a bond for that job. If you are a prime contractor, you’re going to have to do a bid bond as well as a payment and performance bond.

A bid bond is a bond that allows you, as the awarded low bid, to back out of a contract. If you back out for some reason, the insurance company will cover the difference between your bid and the next lowest bid. It’s security for the company you are working for if you decide that you are going to be unable to fulfill your part of the contract. Bid bonds are the responsibility of the prime contractor on a job. If you are a subcontractor, you don’t have to worry about that.

As a prime contractor, if you are awarded a job and everything’s good, you’re going to be required to do a payment and performance bond. At this point, if you cannot perform any part of the job, or you are negligent on that project, then the payment and performance bond has to kick in to either compensate for the differences or to pay for another contractor to come in and do that work.

If you’re hired as a subcontractor, you’ll be required to do a bond portion. You are going to be required to carry your own payment and performance bond to account for your part of the work on the project. That gives the GC the same security that they’re giving to the owner. At that point, it’s the same thing – if you’re negligent and cannot perform your work or abandon the job, then they have the authority to pull your bond and use your bond money as a resource to hire someone else to come in and complete your portion of the work.

For the most part, typically you will work with your own insurance company for bonding, but sometimes, depending on the size of your contract, the GC may ask you a bond rate. They may ask, “Can you give me a bond rate to add in for your portion of work?” Say your bond rate is 1.5%, and the bond rate you’re working off of is a .95%. At that point, they may choose to incorporate you under their bond rate and force you to pay theirs. In the bidding process, as long as you’ve got your bond rate figured in at what it’s going to cost you, then you’re good to go.

If you’re bidding as a prime contractor, bid requirements are going to be in your specs. They’re going to be in your bid package. It’s going to tell you that you’ve got to have a 5% bid bond and you’ve got to have a payment and performance bond. At that point you know that you have to get these quotes from your insurance company, or your bonding company, to be able to figure that in your price.

If you’re bidding as a sub, it’s your responsibility to ask to whom you’re bidding and if you need to figure a bond rate. If you do not ask that question, then shame on you. It could be there. It could not be there. But it’s always worth asking.

Say your portion is $3 million out of a $10 or $15 million project. If you’ve got a 1.2% bond rate, you’re got to pay X amount of dollars per month for that bond. It can get pretty costly. You could be spending $60 – $100 thousand for your bond fees. If you don’t include that in your bid, it’s got to come from somewhere.

Your insurance company should be able to do your bonds. Most of your insurance companies know that if you are doing contractor style insurance, they go hand in hand. But do not take for granted that you can just go out and get a bond. You’ve got to provide financial reports. They’ve got to see your quarterly, yearly numbers. They’ve got to see everything that you do financially. That’s going to determine your bond rate, or even if you’re eligible for a bond.

These are things you need to take care of with your insurance company before you actually bid on a particular job. If you have not taken care of this, and you ask the question, “Do I need to incorporate a bond on this project?” and they say yes, then you need to opt out at that time because you have not been through the procedures with your bonding company to make sure you can do that.